195 Lombardy St., L.L.C. v McCarthy
Annotate this CaseDecided on January 4, 2006
Supreme Court, Kings County
195 Lombardy Street, L.L.C., Plaintiff,
against
Salvatore McCarthy, et ano., Defendants.
16188/05
Carolyn E. Demarest, J.
Upon the foregoing papers in this action by plaintiff 195 Lombardy Street, L.L.C. (plaintiff) alleging breach of a real estate contract for the sale of commercial premises, defendant Salvatore McCarthy (defendant) moves for an order, pursuant to CPLR 3211 (a) (1) and (7), dismissing so much of plaintiff's complaint as seeks damages in excess of the amount agreed to by the parties, in writing, as liquidated damages. Defendant's motion also seeks an order admitting Ronald N. Cobert, Esq. of Grove, Jaskiewicz and Cobert of Washington, D.C., pro hac vice.
On April 1, 2004, plaintiff and defendant executed a written contract for the purchase by plaintiff from defendant of premises located at 195 Lombardy Street in Brooklyn. The contract set forth a purchase price of $2,300,000 and plaintiff deposited a down payment of $200,000 with defendant Fidelity National Title Insurance Company of New York (Fidelity), a title insurance company, as the escrow agent. The balance of the purchase price was to be paid at the closing. The contract provided that the closing date would be December 1, 2004. Section 10 (B) of the contract provided for liquidated damages in the event of a default by defendant, as follows:
"Section 10. Default
* * *
B. If the purchaser shall be in full compliance with the obligations hereunder, and if the seller shall fail or refuse to close title as required by the terms of this agreement on December 1, 2004, or if the seller otherwise is in default hereunder so that the purchaser has the right to refuse to close title, then the purchaser's sole remedy shall be the return of the down payment and to obtain five thousand dollars ($5,000), as liquidated damages, in addition to the cost of the title commitment, and in addition to the cost of one-half of the [*2]phase one environmental audit but not more than one thousand five hundred dollars ($1,500.00), and then neither party to this agreement shall have any further rights or obligations hereunder."
On November 30, 2004, a First Amendment to the contract was executed by plaintiff and defendant, which extended the closing date to January 12, 2005 and provided that the parties shall have the right at any time to mutually agree to modify the closing date. Such First Amendment to the contract further provided that, in all other respects, the April 1, 2004 contract would remain in full force and effect.
The closing, however, did not take place on January 12, 2005. By letter dated May 3, 2005, defendant's counsel advised plaintiff's counsel that defendant did not intend to close title. He noted that two 550-gallon tanks, which were buried on the premises and at one time presumably used for storage of motor fuel, could not be located, and that there was some confusion as to whether plaintiff would accept the premises without resolving this issue. He further explained that defendant did not wish to close because he had found no other suitable location for his trucking companies and a proposed lease of the premises back to defendant would not meet defendant's needs. He stated that defendant, therefore, in compliance with section 10 (B) of the contract, was enclosing a check for $6,500, representing the liquidated damages of $5,000, plus the $1,500 maximum amount for the phase one environmental audit. He also enclosed a letter authorizing Fidelity, as the escrow agent, to release the down payment to plaintiff.
By letter dated May 4, 2005, plaintiff's attorney returned defendant's $6,500 check and refused the return of plaintiff's down payment. He stated that plaintiff was willing to accept the premises regardless of the existence of the underground storage tanks and their location and that plaintiff had agreed to lease a portion of the premises back to defendant, as had been proposed by defendant. He contended that due to the execution of the First Amendment to the contract, plaintiff's reliance upon consummation of the transaction and the doctrine of laches, defendant was precluded from enforcing section 10 (B) in terminating the contract.
On May 25, 2005, plaintiff filed the instant action against defendant. The complaint seeks specific performance of the contract and also purports to allege a claim of fraud against defendant. It requests compensatory and punitive damages in the event that specific performance is not granted.
In support of his motion to dismiss, defendant relies upon the liquidated damages clause in section 10 (B) of the contract. As set forth above, the unambiguous and specific language of section 10 (B) expressly provides that such liquidated damages shall be plaintiff's "sole remedy," and that upon the return of the down payment and $6,500, "neither party to this agreement shall have any further rights or obligations hereunder."
Such liquidated damages clauses have been held to be enforceable (see JMD Holding Corp. v Congress Financial Corp., 4 NY3d 373, 381 [2005]; Fifty States Mgt. Corp. v Pioneer Auto Parks, 46 NY2d 573, 577 [1979]; Truck Rent-A-Center v Puritan [*3]Farms 2nd, 41 NY2d 420, 425 [1977]; Federal Realty Ltd. Partnership v Choices Women's Med. Ctr., 289 AD2d 439, 442 [2001]; J.R. Stevenson Corp. v County of Westchester, 113 AD2d 918, 920 [1985]). A liquidated damages provision "is essentially an estimate, made by the parties at the time they enter into their agreement, of the extent of the injury that would be sustained as the result of a breach" (Federal Realty Ltd. Partnership, 289 AD2d at 441; see also Truck Rent-A-Center, 41 NY2d at 424). "Since the purpose of a liquidated damages clause is to prevent, in the event of a breach, any question as to the amount of damages that may be recovered, a clause which is reasonable precludes any recovery of actual damages" (Federal Realty Ltd. Partnership, 289 AD2d at 441). "This is so even though the stipulated sum may be less than the actual damages sustained by the injured party" (J. R. Stevenson Corp., 113 AD2d at 921).
Plaintiff argues that the liquidated damages clause set forth in section 10 (B) is an unenforceable penalty. In support of this argument, it asserts that the amount of liquidated damages set forth therein is disproportionate to the probable loss which it will sustain due to certain tax consequences of defendant's failure to close. Specifically, plaintiff states that it named the premises with its qualified intermediary to be the exchange property to be purchased pursuant to section 1031 of the Internal Revenue Code. Plaintiff claims that, because of defendant's long delay in attempting to terminate the contract after the January 12, 2005 closing date was set in the First Amendment, it is now in danger of incurring damages for Federal, New York State, and New York City taxes in excess of $460,000. It avers that these damages are a direct result of defendant's failure and refusal to complete the sale of the premises.
It is the burden of the party seeking to avoid liquidated damages to show that the stated liquidated damages were, in fact, a mere penalty (see JMD Holding Corp., 4 NY3d at 380). Here, plaintiff cannot satisfy this burden. Plaintiff knew of the possible consequences of defendant's default when it executed the contract. Plaintiff made its bargain with defendant openly and fairly and, by its own agreement, limited its damages in the event of defendant's default, without qualification, to those solely provided for as liquidated damages under the terms of the contract (see id. at 382-383). The Court notes that there is no reference or representation in the contract regarding plaintiff's alleged 1031 transaction or the effect thereon of defendant's failure to close within a specified period. Section 19 of the contract states that all terms agreed between the parties are contained therein. As noted by movant, if, at execution of the contract, plaintiff was aware of its prospective tax losses as a result of defendant's breach, it must have anticipated them in agreeing to the$5000 liquidated sum and could not have been "defrauded" by defendant. If plaintiff was not aware of its 1031 concerns at execution of the contract, certainly the defendant could not have "fraudulently induced " plaintiff to enter into such agreement with the intention of depriving plaintiff of its 1031 tax advantages.
"Absent some element of fraud, exploitive overreaching or unconscionable conduct . . . there is no warrant, either in law or equity, for a court to refuse enforcement [*4]of the agreement of the parties" (Fifty States Mgt. Corp., 46 NY2d at 577; see also JMD Holding Corp., 4 NY3d at 380). The amount of liquidated damages stated and agreed to by the parties in section 10 (B) of the contract was " the product of an arms-length transaction between sophisticated businessmen, ably represented by counsel'" (JMD Holding Corp., 4 NY3d at 382, quoting Walter E. Heller & Co. v American Flyers Airline Corp., 459 F2d 896, 899 [2d Cir 1972]). Thus, the parties, having freely bargained for the inclusion of an exclusive liquidated damages clause and agreeing to be limited to the amount of liquidated damages set by them in section 10 (B) of the contract, should be held to that bargain (see Fifty States Mgt. Corp., 46 NY2d at 577-579).
Moreover, contrary to plaintiff's argument, liquidated damages clauses have never been characterized as a penalty to the party receiving the liquidated damages, but only (and then in rare cases) to the party who must pay such damages (see JMD Holding Corp., 4 NY3d at 381; Fifty States Mgt. Corp., 46 NY2d at 577). This is because "[i]f an amount stipulated in the liquidated damage clause is manifestly disproportionate to the actual damage, then its purpose is not to provide fair compensation but to secure performance by the compulsion of the very disproportion'" (J.R. Stevenson Corp., 113 AD2d at 920, quoting Truck Rent-A-Center, 41 NY2d at 424).
Here, plaintiff is not the party which would be required to pay these liquidated damages or who is being compelled to perform due to the amount of these liquidated damages; rather, plaintiff is the party which would receive these damages from defendant. Plaintiff claims only that it would be penalized by receiving from defendant the very amount of damages for which it bargained in the event of defendant's default. Plaintiff cannot avoid this limitation and seek such additional damages (see JMD Holding Corp., 4 NY3d at 381). It is not entitled to any more than the liquidated sum to which it agreed when it executed the contract (see Federal Realty Ltd. Partnership, 289 AD2d at 441).
Plaintiff further contends that its complaint asserts more than a breach of contract claim and includes claims for fraud in the inducement and willful, malicious, and reckless conduct by defendant. In fact, the complaint does not expressly allege a cause of action for breach of contract. Plaintiff argues that section 10 (B) of the contract cannot be used to preclude damages, including punitive damages, for its claims, which it alleges, arise out of conduct outside of the contract. In attempting to allege a claim of fraud, plaintiff asserts that defendant made material false representations regarding his willingness to close title and that these false representations induced it to enter into the contract and to extend the closing date. It argues that it relied upon these false representations to its detriment. Specifically, plaintiff claims that it will pay substantial taxes as a result of defendant's alleged fraudulent inducement and failure to close.
It is well established, however, that general allegations in a complaint that a defendant entered into a contract while lacking the intent to perform it are insufficient to support a claim for fraud in the inducement (see New York Univ. v Continental Ins. Co., 87 NY2d 308, 318 [1995]; Sangro Mgt. Corp. v Clinton Hills Apts. Owners Corp., 21 [*5]AD3d 545, 546 [2005]; Gupta Realty Corp. v Gross, 251 AD2d 544, 545 [1998]; Non-Linear Trading Co. v Braddis Assocs., 243 AD2d 107, 118 [1998]). Thus, plaintiff's allegation that defendant fraudulently induced it to enter into the contract while never intending to sell the premises is simply a breach of contract claim (see Sangro Mgt. Corp., 21 AD3d at 54; Rosen v Watermill Dev. Corp., 1 AD3d 424, 426 [2003]; Jim Longo, Inc. v Rutigliano, 251 AD2d 547, 548 [1998]; Mastropieri v Solmar Constr. Co., 159 AD2d 698, 700 [1990]). The damages for such breach are stated in section 10 (B) of the contract negotiated between the parties. Plaintiff cannot transmute a breach of contract cause of action into one for fraud and punitive damages in order to avoid the terms of the contract.
Moreover, punitive damages are only available where necessary to deter "gross dishonesty" or "gross" and "morally reprehensible" behavior which affects a public right or interest. New York Univ., 87 NY2d at 315. Here there are no allegations of behavior which affects any interest other than the private interests of plaintiff under the contract. The complaint therefore fails to state a cause of action for punitive damages.
Plaintiff's allegation that defendant jeopardized its tax advantage amounts to nothing more than a claim of breach of contract. Every breach of contract for the sale of realty has tax consequences. Unless the seller has affirmatively agreed to shoulder the burden for such taxes, the obligation is solely that of the party to be taxed. The contract contains no representations of any sort or kind dealing with such tax considerations. Indeed, the liquidated damages clause agreed to by the parties specifically covers all rights and obligations between the parties. The damages claimed by plaintiff relating to such taxes merely constitute damages under a breach of contract cause of action (see Alexsey v Kelly, 205 AD2d 650, 651 [1994]). Therefore, plaintiff cannot claim additional damages as a result of its inability to take tax advantages of the purchase.
Plaintiff also contends that defendant should be precluded from relying on the liquidated damage provisions of the contract because defendant is guilty of laches in adjourning the closing date to January 12, 2005 in the First Amendment preceding defendant's default and then delaying four months in notifying plaintiff that he would not close. Plaintiff claims that the First Amendment to the contract provided that "time is of the essence" with respect to the January 12, 2005 closing date. However, the First Amendment to the contract, in fact, omitted the "time is of the essence" provision contained in the April contract. Instead (as discussed above), it actually provided that "the parties shall have the right at any time to agree mutually to modify the closing date." The First Amendment further provided that the April 1, 2004 contract, which, in section 10 (B), specifically set forth plaintiff's sole remedy with respect to damages in the event of defendant's default, would "remain in full force and effect." Under these circumstances, defendant's adjournment of the closing date to January 12, 2005 in the First Amendment and his four-month delay until his May 3, 2005 notification that he did not intend to close, cannot be deemed to be laches or otherwise constitute such unconscionable conduct so as to justify equitable intervention to preclude him from [*6]enforcing the plain and unambiguous terms of section 10 (B) of the contract, to which plaintiff had agreed (see Fifty States Mgt. Corp., 46 NY2d at 578).
Plaintiff additionally argues that article 12 of the contract, entitled "Environmental Audit," which deals specifically with the possible existence of the 550-gallon tanks, does not permit cancellation of the contract based on the Environmental Audit by defendant but, rather, only permits such cancellation by plaintiff. Such argument is unavailing since defendant is not claiming that he is not in default under the contractual terms, but simply that section 10 (B) of the contract limits plaintiff's remedy for such default. The liquidated damages clause set forth in section 10 (B) of the contract is all-encompassing, complete, and specific. There is no limitation placed upon this default provision and defendant's failure to convey title for any reason triggers the liquidated damages clause agreed to by the parties. Thus, the grounds for defendant's default are immaterial since they do not alter the amount specified as liquidated damages.
Plaintiff's argument that the lease of the premises back to defendant was actually proposed by defendant and that it had fully agreed to the terms of this proposal is similarly of no moment. The issue of the proposed lease and the reason for defendant's default under the contract have no bearing upon plaintiff's remedy in the event of such default.
Accordingly, defendant's motion for an order, pursuant to CPLR 3211 (a) (1) and (7), dismissing so much of plaintiff's complaint as seeks damages in excess of the amount agreed to by the parties, in writing, as liquidated damages in section 10 (B) of the contract, is granted.Plaintiff's second cause of action sounding in fraud is deemed to be a claim for breach of contract. The third cause of action for punitive damages is dismissed. Defendant's motion for an order admitting Ronald N. Cobert, Esq. of Grove, Jaskiewicz and Cobert of Washington, D.C., pro hac vice (which is unopposed), is granted.
Defendant shall serve and file its answer within 30 days of the date of this order. All parties shall appear for a conference on March 29, 2006. The Court shall be notified promptly if this case is settled between the parties.
This constitutes the decision, order and judgment of the court.
E N T E R,
J. S. C.
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